Unsold Shares: White Knights and 'Patient Money'
April 14, 2015 — Unsold shares. Those two little words make up a lucrative niche in the city's real estate market that can be a vexing headache for co-ops. That's because unsold shares sometimes prevent co-ops from becoming what they're supposed to be: corporations composed of shareholders who live in a building and work toward its long-term fiscal and physical well-being. Healthy co-ops, in other words, are built on owner occupancy. Unsold shares in co-ops are, as a rule, rent-controlled or rent-stabilized apartments, usually occupied by long-term renters. Owners and renters tend to be oil and water. And that's the problem.
Purchasers of blocks of unsold shares are not looking to turn a fast buck. While they've historically been able to buy blocks for anywhere from 30 to 45 percent of their market value, it may be years before they are able to see a profit from sales of those apartments. There's a term for what these investors bring to the table. It's called "patient money."
There are, however, a handful of investors who buy unsold shares with no intention of selling them — despite the landmark 2002 Court of Appeals decision in 511 West 232 Owners Corp. et al. v. Jennifer Realty Co. That ruling says that offering plans carry an implied obligation for sponsors to sell enough shares for the co-op to become "fully viable." This refusal to sell might flout the law and infuriate shareholders in the co-op, but, says one broker, it "makes the investor's grandchildren very, very happy."
Susan Hewitt, president of The Cheshire Group, has been involved in the bulk sales of unsold co-op shares for the past quarter century — since the bad old days of sponsor defaults in the early 1990s. Back then, investors in these distressed properties were known as "white knights" — a bit of a misnomer since it implies altruism on the part of the investors, rarest of rare things in the sharp-elbow world of New York City real estate. Today, as back then, buyers of blocks of unsold shares are drawn by something much less lofty than altruism: the chance to make a handsome profit.
"It's the nichiest of niche businesses," says Hewitt, noting: "It's not for everyone, and it's definitely not for investors in quest of a quick score. These unsold shares are not easily financeable, so they're liquid, and they're management-intensive. They involve a complex relationship with the co-op board. You really have to be completely familiar with the city's rent-regulation system and how co-op and condo boards work."
It may be a niche market, but it's one that broker Mark Zborovsky has been working since the late 1980s. In all those years, he says, the concept of his business has not changed much, regardless of the state of the real estate market. When a sponsor decides to sell a block of unsold shares, investors usually pay cash for those sharply discounted shares, even though the cash flow in those apartments is often negative — that is, rental income doesn't cover maintenance and other costs. Then it becomes a waiting game.
"The investor waits for the renter to move out or die," Zborovsky says, "and then it's a free-market apartment."
There are maybe a dozen bulk sales in the city every year. While Zborovsky's biggest sale was a 665-unit block in The Bronx in 2013, some sales are as small as nine apartments. Most blocks are between 20 and 100 apartments. He just brokered the sale of a block of 41 apartments in a 95-unit condo on the Upper West Side of Manhattan. The investor paid $37 million — about one-third of the apartments' market value. It's a chance for the investor to make a handsome profit. Eventually.
Adapted from "Work Out" by Bill Morris (Habitat, April 2015).
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